Do big private banks only need to play it safe to stay on top?

While rival private banks are caught up in costly restructurings or fallout from unwise investments, J.P. Morgan has thrived by simply staying out of trouble. But will a lack of penetration into Asian markets be expensive in the long-term?

While many private banks are devising new investment strategies, technological innovations and refining their approach to key target markets, there is a view among observers that size matters and you don’t have to do too much if you are big enough.

Avoiding scandal, mismanagement and frequent restructures can be enough to lead the pack. Credit Suisse imploded after a series of misadventures in the investment bank contaminated the private banking brand. After UBS was railroaded by the Swiss government into taking over its Zurich rival, the larger player’s boss, Iqbal Kahn, has been left with a massive integration challenge. Promotion to the top job will now depend on how he handles the tricky consolidation.

On paper it has looked simple, but the practical, day-to-day challenge has involved re-onboarding clients, with lucrative relationships developed by Credit Suisse now being re-assessed. One by one, each client is being painstakingly re-examined by compliance teams. This is a demanding operation, when most clients have global relationships, businesses and societal links.

Julius Baer, a fast-expanding and generally friendly Swiss brand, linked with a modicum of innovation and investment expertise, has also been hit by unwise investments which dented both profits and customer perceptions.

Citi Private Bank on the other hand, under a massive restructure at the hands of Jane Fraser, has been firing capable people with expertise in investment, business and innovation. 

Observers believe the bank will suffer from losing top talent, at a time where most major wealth managers are desperate to differentiate themselves. Is this a tacit admission from Ms Fraser that the largest players are increasingly commoditised? That service and investment prowess no longer matter, as long as correct strategic decisions are made about which geographical markets and client segments to focus on?

J.P. Morgan’s success

While mid-size cross-border pioneers Pictet and Lombard Odier continue to prosper, and lead the way in prioritising investment expertise, it is J.P. Morgan which has particularly profited from difficulties at rivals. “They don’t have to do much in the current environment,” suggests one former c-suite private banker. “Today they are bound to succeed, simply by existing.”

Under leadership of Jamie Dimon, the type of banker who succeeds is telling. Pundits say they need to be capable, if not too talented, and perhaps slightly robotic to run ultra-high net worth business for which the bank has been famed in recent times.

The reason why some are sceptical of J.P. Morgan’s longer-term success in private banking is the US bank’s lack of commitment, resources and penetration in south-east Asia, the key global growth market for major competitors UBS, HSBC and Citi. 

Eastern challenges are immense, despite promising market dynamics. This is a rapidly growing, if highly fragmented market, still not dominated by any major player. The current slowdown in China is likely to have a ripple effect in banks across the region. Some insiders are already talking about “disappointing results”.

There have already been casualties, when European institutions including SocGen and ABN Amro pulled out, selling “experimental” operations to rivals with deeper pockets.

Major cross-border European wealth managers, including BNP Paribas, are achieving some success by carefully selecting their shots. When attacking on several fronts, resources, commitment and access to advisers with contacts among top tycoons are needed.

Clearly, there is a major mid-market opportunity for boutiques and family owned firms. The success of LGT, tripling managed assets over a 10-year stint, has been incredible. But is this a potential blueprint for other rising powers in private banking, or a one-off event? Most observers favour the latter explanation.

Leading from the front

Visionary leadership can override regressive structures, no matter how set private bankers are in their ways. Prince Max, the blue-blooded yet highly relatable boss at LGT, has shown just how far that influence can go. Yet he and the Liechtenstein Royal Family also have deep pockets. Having a major family as key shareholder of a private bank is an undoubted advantage. But so is creating a friendly, accessible and morally acceptable culture around sustainability and treating clients fairly. This necessitates hiring the best bankers in their spheres of expertise.

The continued prowess of the mid-market banks in continental Europe is a lesson for larger players, who have struggled to provide the quality of investments and service offered by Pictet and Lombard Odier.

Amin Rajan, CEO of the CREATE consultancy, refers to Pictet’s “benchmark” for industry rivals, which is far from a static one. “Pictet has constantly raised the bar for itself to retain pole position.”

Pictet’s brand – associated with safety and benign living conditions of Switzerland – benefits from what wealthy families perceive as increasing social and political instability across much of Europe.

With the largest firms concentrating on Asian business, Europe’s old and new money is becoming an attractive pool for cross-border players who understand the nuances of working in different markets, yet few banks have the competencies needed.

It is a similar story at the top of the pyramid. As Gerard Aquilina, a former regional boss at Barclays, HSBC and Merrill Lynch, now advising rich clans, is fond of saying: wealthy families and entrepreneurs are a demanding bunch, unwilling to settle for inferior service.

“Entrepreneur clients are less interested in 2 to 3 per cent more on their portfolios and more in how their bank can help grow their business,” he suggests. This requires access to credit, risk management, derivatives, foreign exchange, hedging and other corporate financial services.

This means a private banker must “share” their clients with colleagues in their firm’s investment bank. “Getting institutional and retail to work together is fraught with difficulties and many banks have failed in making this partnership work,” warns Mr Aquilina.

Any major bank that can successfully offer both sides of the business – and the resources needed mean it has to be a behemoth – will reap the rewards.   

Yuri Bender is editor-in chief of PWM